Utilities – between license negotiations and new revenue streams

The boardrooms in Cayman’s private-sector providers of water and electricity anticipate 2015 with some excitement as they watch fuel prices drop, license negotiations progress and new revenue streams develop.

All in all, according to both Consolidated Water Company and the Caribbean Utilities Company, the new year indicates good things – and the processes are already afoot.

CWCO will begin building its new $700 million, 100 million gallon-per-day desalinization plant in Rosarito Beach, Mexico, south of Tijuana, while CUC has at last sent to its Electricity Regulatory Authority bosses a freshly inked agreement to purchase solar-generated power from Pittsburgh-based International Electric Power.

CWCO President and CEO Rick McTaggart says the Tijuana plant is the company’s biggest, and will supply Mexico, as well as between 25 million and 40 million gallons per day to nearby San Diego County’s 3.2 million people across the U.S. border. The move will place CWCO squarely in the middle of the southwest U.S. “water wars,” a lengthy contest among states and municipalities that draw resources from the Colorado River.

Drought and development have stretched supplies to the breaking point, pitting “upper basin” states like Wyoming and Colorado against “lower basin” states like Arizona and California, particularly Los Angeles, in increasingly bitter disputes over rights to the limited commodity.

“This project will be part of a regional solution to water problems in northern Mexico and the southwest U.S.,” McTaggart says. Tijuana, a major industrial and tourist hub, is “one of the biggest water users in the area.”

CWCO “desal” supplies, however, may enable the city to sell its upriver water rights to Las Vegas, at least contributing to alleviation of a pressing problem – and perhaps sparking future CWCO investment in the area.

Meanwhile in North Sound Road, CUC President and CEO Richard Hew says sharp reductions in global oil prices – due to both burgeoning supply and diminished demand – will be reflected in local electricity bills early this year.

“Fuel prices have been on the decline, and this benefit is being passed on to our customers already,” he says, but he cites an approximate 60-day time lag for “new oil” to move through the system, displacing more expensive “old oil.”

“[W]ith the two-month time lag on the pass-through, the impact will be more noticeable in early 2015,” Hew says. “The government’s plan to reduce the duty on fuel in January 2015 will also directly benefit electricity consumers beginning in March.

“We are therefore very happy for the price reductions that will open the 2015 year for our customers.“

In late-June, government announced a 33 percent cut – to take effect in January – in the 75 cent-per gallon import duty on diesel fuel.

While the reduction was projected to cost government $4 million in revenues during the financial year, it was also expected to shrink electricity bills by an average 4.3 percent, meaning, for example, a reduction of $12.90 on a monthly $300 invoice.

At the time Finance Minister Marco Archer pegged the reductions to stable fuel prices, meaning March CUC electricity bills could shrink more than 4.3 percent in the wake of oil’s global price decline.

Hew says electricity sales have been “fairly flat” in the “past few years,” citing better consumer efficiency spurred by high prices in a struggling economy.

“So one of the major challenges the company has faced … has been to control its costs without compromising the high levels of service reliability that our customers expect,” he says.

He claims CUC has been unmoved by the fall in sales, and plans to push for even greater efficiencies in future: “Whereas the loss of sales due to customers being proactive hurts the company in the short term, we continue to believe that it will prove beneficial to a healthy long-term relationship with our customers, which is our objective.

“It is in this vein that we promote energy efficiency and are investing in projects such as smart meters that will assist customers with consumption information,” Hew said.

McTaggart said his 2013 bottom line was also the victim of declining sales, pointing to a difficult economy and customer efficiencies.

“In the Cayman market, we had seen a decline in sales of 5 percent to 7 percent per year for three years,” he says, and stagnation had persisted even longer: “We had been experiencing it over the past four years or five years.”

As a result, the company looked overseas, settling on the Mexico project and another in Bali’s Nusa Dua, Indonesia’s chief five-star resort area.

The expenses of the two projects “impacted our financial results over the past four years,” McTaggart says.

“We bought out one of our partners in Mexico in February this year, and that impacted our net,” while revenues fell in CWCO’s British Virgin Islands operations, “and so that hit us in 2014,” McTaggart says.

Commissioned in late April 2013, the 250,000 gallon-per-day Bali plant – with a capacity for expansion to 1.6 million gallons – “is running and operational.” By November of that year, it was pumping an additional half-a-million gallons per day.

By the third quarter 2014, McTaggart says, “things were picking up. Higher tourism numbers and drier weather reversed the decline.”

The company said revenues grew 10 percent to $17 million during the period compared to the previous year, driven by retail water revenue increases of 18 percent to $5.9 million.

Most of the growth came from 17 percent higher retail water sales in the Cayman Islands.

As construction starts on CWCO’s Mexico project, CUC is contemplating its own grand experiment, last month signing a “power purchase agreement” with IEP for 5 megawatts of solar-generated power.

Pending ERA approval of the proposed 20-year agreement, IEP will start the yearlong $1.4 million construction of a 20,000-panel array on 21 acres near Pease Bay Pond east of Bodden Town.

“CUC has … negotiated with an independent renewable-energy producer to purchase energy from a 5MW solar facility in Bodden Town,” Hew told the Journal. “The project has received Planning Authority approval,” and awaits only the ERA nod.

Among the issues the ERA will weigh are efficiency and cost. Authority Managing Director Charles Farrington earlier said that while renewables are the shape of the future, “people might not be so excited” if they proved more expensive than oil-generated power.

Hew, who has publicly worried about the cost of renewables, agrees with Farrington: “We are challenged … to bring more renewable energy onto our system without significantly increasing the cost of energy to our customers,” leaving the power purchase agreement open to questions of degree.

Renewables can also be brought onto the national grid through CUC’s Consumer Owned Renewable Energy program, in which the company buys renewable-energy production from independent producers dotted around Grand Cayman, feeds the power into the national grid, selling it back to the producers at reduced costs as they require supplemental supplies.

Hew unveiled the first statistics for the CORE program, which CUC has limited to an aggregate of 2MW. He called scheme, started in January 2009, “quite successful.”

“During the past year, there has been a significant increase in customer participation and the resulting increase in renewable and alternative energy available to the CUC system,” he said. “At the end of November there were 62 customers connected with total capacity of 684.60 kilowatts and 35 more customers approved for additional 876.39kW capacity.”

He declined to say if the company would expand the program as producers – set to generate 1.56MW — approach CUC’s 2MW cap.

As CUC wrestles with its ERA regulator, CWCO is likewise wrestling with its own overseer, which is also one of its biggest customers, the government-owned Water Authority-Cayman.

CWCO supplies all the potable water the WA distributes in Grand Cayman, while serving its own residential and commercial customers since 1973. Government only granted a formal license to the company in 1979.

In 2011, the WA gained the power to grant licences. Since then, CWCO has been in talks with the authority and government for a new license, which may involve changes to consumer prices and how they are calculated.

“We’ve had a rate structure since 1979 linked to cost indices: 45 percent of our base water rate never changes, 20 percent is linked to the Cayman Islands consumer price index and 35 percent to the U.S. producer price index.” McTaggart said. “It provides raises with inflation, and sometimes decreases with deflation – and it has nothing to do with financing or capital costs, just operating costs.”

“We were a year into the negotiations when government and the authority decided they didn’t like that formula and wanted more of a CUC-style agreement, linked to very different factors.”

The proposed scheme of control, he says, does not so much regulate the rates the company can charge, as it regulates the profit the company can earn. He fears the mechanism may compromise efficient operations and boost prices.

McTaggart declines to say more, however, fearing for the sensitivity of the talks, only worrying aloud that a new structure “may not help customers.”

Meanwhile, government has granted piecemeal licence extensions to enable CWCO to operate under its current license. McTaggart rejects suggestions, however, that CWCO has an incentive to delay any new agreement.

While government is unlikely to shutter CWCO, McTaggart says only that “all parties agree that ensuring a reliable supply to our customers during the negotiations is of paramount importance.

“It will take some time to understand what this new license ultimately will mean to the company and our customers, how it will change 40 years of operations,” he says.

“We have not been delaying, but we want to do the best for our customers and shareholders. We have no timetable, but I’m optimistic that we’ll reach an agreement. In the end, we think everyone will cooperate.”